CHICAGO – Illinois lawmakers who approved a temporary income tax increase in 2011 knew it could lead them to a difficult decision: allow the increase to roll back as scheduled next year and cut state spending by about $7 billion, or cast the politically risky vote to make the tax hike permanent.
Now a third option has surfaced that could become one of the most contentious issues in the 2014 election campaign: It’s a proposal to change Illinois’ “flat” income tax structure, in which everyone pays the same rate, to a graduated or “progressive” tax, in which higher earners pay a larger percentage of their income than the less well-off.
Influential Democrats sponsoring legislation in Springfield say the graduated tax – a system used by the federal government and 34 of 41 other states that charge an income tax – is the fairest form of taxation. They say a majority of Illinoisans would get a tax cut from the current rate, but the financially struggling state would take in more money because the wealthiest earners would pay more.
“We hear it said that Illinois is a wealthy state, and it is, but there’s also this great disparity,” said Rep. Naomi Jakobsson, a Democrat from Champaign who’s sponsoring the measure in the Illinois House. “We should have done this a long time ago.”
But Republicans say it’s a tax increase in disguise and accuse Democrats of going back on their word that the 2011 income tax hike would be temporary.
They note Democrats’ promises that the 2011 increase – from 3 percent to 5 percent for individuals – would help Illinois out of its financial crisis, yet two and a half years later, the budget has grown and the state still has a multibillion-dollar backlog of bills.
Opponents also say taking more tax dollars from the highest earners would further drive companies – and jobs – out of the state and put an unfair burden on small businesses and family farms.
“It would be the final nail in the coffin for Illinois,” said Rep. David McSweeney, a Barrington Hills Republican.
Both sides are predicting a difficult and prolonged fight. That’s because Illinois’ constitution mandates a flat income tax rate across all income levels. To change that, both chambers of the General Assembly would have to pass a resolution by a three-fifths vote to put a measure on the ballot asking voters to amend the constitution. That ballot question would then need to be approved by either three-fifths of those voting on the measure or the majority of those voting in the election.
Democrats have tried in the past to change Illinois’ tax structure but the efforts didn’t get off the ground, in part because they didn’t have the supermajorities they do now. The scheduled roll back of the temporary tax increase – which would reduce revenue by about $7 billion – also is adding urgency to the effort, lawmakers say.
Supporters say they’re hoping the Legislature, where Democrats hold big majorities in both chambers, will do its part by early May, the deadline to get the question on the November 2014 ballot. That would allow voters to decide prior to Jan. 1, 2015, when the temporary income tax is scheduled to begin being phased out.
Democrats say their proposal would be similar to one advocated by the Chicago-based Center for Tax and Budget Accountability, which describes itself as a bipartisan think tank.
Ralph Martire, the group’s executive director, says the graduated tax provides a more stable revenue stream because it collects more money from places where wealth has grown the most in recent decades – among the most affluent. His proposal would bring in about $2.4 billion more in revenue per year than the state is taking in under the current 5 percent individual income tax rate. That increase would come from taxpayers making $150,000 or more per year, which he says is about 6 percent of Illinois filers.
The House measure is co-sponsored by Rep. Barbara Flynn Currie, the majority leader and a close ally of Speaker Michael Madigan. Sen. Don Harmon, an Oak Park Democrat and chairman of the powerful Senate Executive Committee, is sponsoring the resolution in the Senate.
Although Democrats have more than a three-fifths majority in both chambers, Harmon thinks “it will be very difficult to do.”
A graduated tax “makes sense, but it’s an attempt to change the status quo, and that’s always difficult,” he said.
Both sides already are gearing up. Advocates have formed a coalition known as “A Better Illinois,” which they say is made up of more than 60 organizations and hundreds of thousands individuals. The campaign’s formal launch is scheduled for August, but supporters began circulating petitions and encouraging voters to contact their legislators earlier this month.
On the other side, McSweeney has lined up co-sponsors for a measure opposing the constitutional amendment. He said last week he believes he has enough support from Republicans and at least one Democrat to stop the graduated tax from making the ballot. But he said he’s trying to persuade more Democrats – particularly those who are more fiscally conservative – to join in the opposition.
In a statement released last month, Republican leaders Sen. Christine Radogno of Lemont and Rep. Tom Cross of Oswego said their caucus is united against it.
“Taxpayers should be wary,” Radogno said. “This isn’t about fairness. It’s about increasing revenue to fuel even more spending.”